2023-11-29 13:00:00 ET
Summary
- T-Mobile recently declared a $0.65 dividend, payable in December.
- TMUS's recent dividend is well-covered for now.
- But the company will need to continue growing its cash flows in the coming years to sustain its dividend payment for the long term.
- Although their debt ratio is lower than peers Verizon and AT&T, this is still a major concern for investors, especially in the current macro environment.
- TMUS's current P/E currently trades below its 5-year average, signaling it could be undervalued and a buy.
Introduction
I felt compelled to write an article on T-Mobile US, Inc. ( TMUS ) after this past weekend. I recently switched cell phone providers after being a Verizon Communications Inc. ( VZ ) customer for more than 20 years. Being from a really small town in Alabama, VZ seemed to work the best. Additionally, I spent a lot of time on U.S. Navy ships and Verizon's service always seemed to have the best connection when we were farther away from land. But still close enough for a signal.
Recently that seems to be changing as T-Mobile has been steadily upgrading their network. While VZ is still a quality provider, TMUS seems to be lapping the once-beloved telecom giant. I also switched my internet recently to TMUS because they offered a better price value. I think the reason T-Mobile is gaining steam on providers like Verizon and AT&T Inc. ( T ) is because they only recently declared a dividend. This means they've had more time and capital to reinvest back into the business instead of paying it out in dividends. But the question is, "With a dividend now declared, is it a buy for long-term dividend investors?" In this article, we'll take a look at T-Mobile's fundamentals to see if they can sustain their recently declared dividend for the long term.
Strong Growth
Most investors know to pay a dividend, a company must generate enough cash to do so. Telecom companies tend to do that, but they also have huge debt burdens they have to pay down as well. It's just the nature of the business. That's why I don't get all bent out of shape looking at their balance sheets. I completely understand the concern but for me, it's not a huge red flag. TMUS recently raised their guidance, which was well-received by Wall Street .
The company boosted its outlook in several areas including operating cash and free cash flow. Additionally, they declared a dividend of $0.65 payable on December 15th, 2023. According to TMUS's 10-Q, the company had roughly 1.25 billion shares outstanding. Paying a dividend of $0.65 would mean a payout of $812.5 million a quarter, which totals $3.25 billion annually.
In Q3, TMUS managed to generate $4 billion in FCF, 50% higher than Q3 '22. This was driven by lower cash purchases of property & equipment and higher cash from operations. They also managed to increase net income to $2.1 billion and net cash to $5.3 billion. Revenue also grew 4% to $15.9 billion. These strong numbers were driven by $386k postpaid net account additions, $850k postpaid net customer additions, and $557k high-speed internet net customer additions. I can proudly say I contributed to those numbers as I became a new customer and internet user for the telecom giant.
The company also raised FCF guidance on the lower end and now expects FCF in a range of $13.4 billion to $13.6 billion, up from $13.2 billion to $13.4 billion prior. Using the higher ranges for both CAPEX and FCF, this would leave the company with $3.8 billion in free cash flow. And with a dividend payment of $812.5 million, the dividend is more than covered for now.
But with an annual commitment of $3.25 billion, the company would need to continue growing its cash flows. Or continue to buy back shares, taking them off the market as they have been doing. Management recently announced a share repurchase program for up to $19 billion scheduled through December of next year. In the quarter they repurchased 19.3 million shares for $2.7 billion and through September had repurchased a total of 98.8 million shares for $14 billion.
Furthermore, in the month of October, they repurchased an additional 5.5 million worth of shares. So, as the company continues buying back its shares, I expect net income and FCF to grow steadily. One thing about telecom companies is that they are CAPEX and debt-intensive, so investors have to be mindful of this when investing in these companies for the dividends.
Balance Sheet vs. Peers
The #1 question for investors with telecom companies is, "How's the debt?" At the end of Q3, TMUS had $77.9 billion worth of debt. Excluding their tower obligation, this totaled $72.8 billion. In comparison to peers Verizon and AT&T, TMUS's debt is significantly lower by roughly half. In Q3, they had a net debt to adjusted EBITDA ratio of 2.6x, while their peers both have ratios above 3x. For telecom companies below 3.5x is what I prefer to see.
All three have been focused on paying down their debt over the years, but it's a very slow process for these companies as they have to spend a ton of capital on growing the business. And it seems like once the CAPEX is done being spent investing in something like 5G, the next business venture is soon after. But in my honest opinion, TMUS seems to be doing all the right things which is why they've seen a large increase in customer additions over the years. Waiting to pay a dividend was a smart move, to be honest.
Growth Outlook
With TMUS now declaring a dividend, an important metric is the company's ability to grow their financials over time. Like I previously mentioned, the company raised their outlook essentially across all metrics. Cash from operations guidance was also raised to $18.3-$18.5 billion from $18-$18.3 billion prior. And over the next two years, TMUS is expected to continue growing both CFO and FCF. Cash from operations is expected to grow nearly 15% next year and then slow in 2025 to roughly half at 7.6%.
Free cash flow is expected to grow 22.3% and 6.1% respectively over the same time. So as seen in the chart below, growth in both is expected to slow quite a bit from 2024 to 2025. But as I always say some growth is better than no growth. And those who invest in telecom companies should know these are not known as high-growth businesses. They're mainly low-growth companies who pay relatively stable, slow-growing dividends.
Valuation
At the current price of $148 at the time of writing, TMUS's P/E still trades above the sector median but below its 5-year average of 25x. Currently, 18 Wall St. analysts rate the stock a strong buy and 11 rate it a buy. Additionally, the stock offers a double-digit upside to its price target of $177. For dividend stocks, I like to use the Dividend Discount Model, but with T-Mobile only recently electing to pay a dividend, there's not enough substantial data to calculate its growth rate. But as a long-term investor, I think the stock is attractive right now. As the telecom giant continues to grow its financials and repurchase shares, I expect investors, especially those who like dividends, to buy into the stock in the foreseeable future.
Risk Factors
In my opinion, T-Mobile has outperformed its peers over the last few years. Cell phones are essential to our everyday lives and are a must-have form of communication. But with tighter consumer spending and an expected recession, this may cause net additions in the future to slow as consumers look for cheaper, off-brand alternatives.
If rates continue to go higher, this could cause some additional headwinds for them in the coming months. While I expect rates to come down in 2024, if the FED decides to hold or raise to battle inflation, the stock price could suffer. It's likely dividend investors will keep a close eye over the next few quarters to see customer additions and how the company handles their debt going forward, especially now since they've declared a dividend. If their debt continues to rise significantly, this will affect dividend growth in the future.
Investor Takeaway
TMUS outperformed peers VZ and T over the last few years, and one reason for this outperformance was the fact the company didn't have to pay out billions of its cash flows for dividends. But recently they elected to pay a dividend, payable next month. While this is great, investors should be cautious going forward as huge debt burdens tend to be a major concern for telecom companies. As of now, the telecom giant has more than enough to cover its dividend and has been doing all the right things to grow the business, including buying back shares.
This will allow them to continue growing cash flows as they can save more by taking a significant amount of shares off the market. They are currently doing this as seen by their $19 billion program announced recently. Cash from operations and free cash flow are also expected to grow over the next two years. With T-Mobile trading below its 5-year average, if you're a long-term dividend investor looking to add a position, I think the stock is a buy here.
For further details see:
T-Mobile: Dividend Declared, But Is It A Buy For Long-Term Dividend Investors?